LETTER: Trump confusion over tariffs and trade
While Donald Trump’s behavior regarding god, religion and love is laughable, his commitment to his fourth favorite word — tariffs — is not.
He has stated that trade deficits can be rebalanced by using tariffs to make imported products more expensive for U.S. consumers. Trade deficits occur when we buy more than we sell to a country. They sound bad, but they are neither good nor bad.
The United States has the strongest economy by GDP, the strongest consumer market, the dollar as a reserve currency (most worldwide transactions are conducted in dollars), high liquidity, technology and innovation, in addition to the rule of law. Thus, almost all countries want to sell in the U.S. market
In an article published last week, Boston University economics professor Tarek Alexander Hassan writes, “America is getting more cheap goods and in return it is giving foreigners financial assets: dollars issued by the federal reserve, bonds from the U.S. government and American corporations, and stocks from newly created firms.”
A country can have a trade deficit only if it has an equally sized investment surplus. We are able to sustain a large trade deficit because so many countries are eager to invest here, which, in turn, allows U.S. households to consume more.
“Tariffs do nothing to reduce the foreign demand for U.S. dollars, stocks and bonds,” Mr. Hassan noted. “If the investment surplus doesn’t change, the trade deficit cannot change. Instead the U.S. dollar just appreciates, so imports get cheaper, undoing the effect of the tariff. You can’t have an investment surplus and a trade surplus at the same time.”
Seemingly, Mr. Trump views American economic strength as a weakness. Reducing the trade deficit should be done by reducing the budget deficit, which will lower interest rates and therefore make investing here less attractive to foreign investors. Erratic foreign policies and extreme tariffs will likely scare off foreign investors, eroding the country’s economic dominance.
